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Economists cannot avoid making value judgments

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AMID the name-calling and bluster that mar many fights between economists are a few common tactics. Belligerents may attack the theory used to support a claim, or the data analysis used to quantify an effect. During the debate over President Donald Trump’s tax bill, to take a recent example, economists bickered over which side had more credibly calculated the economic effect. They did not, for the most part, argue about whether it was morally acceptable to pass a regressive tax reform after years of wage stagnation and rising inequality. To do so would strike many economists as entirely un-economist-like. Yet economics has not always been so shy about moral philosophy. As well as “The Wealth of Nations”, Adam Smith wrote a Theory of Moral Sentiments”. Great 20th-century economists like Paul Samuelson and Kenneth Arrow also took questions of values very seriously. Their successors would do well to take several pages from their books.

Modern economists have attempted to strip value judgments out of their policy analyses. Policies are judged on how they are likely to affect economic variables such as income and its distribution, and how those changes would affect overall welfare. If the models suggest that one policy choice—a top tax rate of 40%, say, rather than 50%—leads to greater welfare than another, that is usually good enough for an economist.

This approach is enormously valuable. It disciplines thinking, produces useful information and makes it easier to build professional consensus about what is known and which questions remain unanswered. Though cost-benefit analysis is not perfect, is often the best route to getting informed experts to agree.

Used in isolation, however, it can lead to trouble. In a paper presented at the annual conference of the American Economic Association (AEA) in January, Matthew Weinzierl, of Harvard University, notes that the world is too complicated to be modelled with anything like perfect accuracy. Many knock-on effects from policy shifts are unknowable beforehand. He suggests that in the absence of perfect foresight, policymakers could turn to social principles or rules that have evolved over time. These may reflect accumulated knowledge about some choices’ unintended consequences. He gives an example. Governments might choose to increase redistribution based on evidence that high inequality creates feelings of envy, and envy reduces the welfare of the non-rich by making them feel worse. Yet survey evidence suggests that people are largely opposed to redistribution that is motivated by envy. Validating envy through tax policy could prove socially corrosive, in a way that economists’ models fail to capture.

Put differently, Mr Weinzierl contends that economists should take moral concerns more seriously. That is something close to professional heresy. At the AEA conference Alvin Roth, a Nobel prizewinner, delivered a lecture on his life-saving work in the field of market design. To donate an organ, one must share a blood-type with the recipient. Someone who would be willing to donate a kidney to a friend or family member might be stymied by a difference in blood-type. Mr Roth circumvented this problem by developing matching markets, in which one person donates to a compatible stranger and in turn receives another stranger’s compatible organ for use by the donor’s ailing loved-one. Such swap groups can include scores of donors and recipients, who might otherwise have died awaiting a transplant.

Yet demand for healthy organs vastly outstrips supply. Were it legal to buy and sell organs, many more people might donate, helping to alleviate the deadly shortage. Moral qualms generally discourage governments from legalising the trade. This is an example of what Mr Roth calls a “repugnant market”, one which is constrained by popular distaste or moral unease. Repugnance, he laments, tilts the political playing field against ideas that unlock the gains from trade. He recommends that economists spend more time thinking about such taboos, but mostly because they are a constraint on the use of markets in new contexts.

These social rules also contain insights. In a paper discussing the organ trade Nicola Lacetera, of the University of Toronto, argues that there may be important reasons for moral objections to repugnant activity, and costs to abandoning such objections. Though studies show that telling people that payment encourages organ donations increases support for legalising payments, other examples work in the opposite way. Giving women information about the health and safety benefits of legalising prostitution seems to reduce support for legalisation—perhaps because women worry about the consequences of applying a cost-benefit approach to areas relating to their status within society.

Do the right thing

Not all economists avoid ethical considerations entirely. Jean Tirole, another Nobel prizewinner, devoted a chapter of his recent book, “Economics for the Common Good”, to “the moral limits of the market”, for example. He says economists should respect society’s need to set its own goals, then help devise the most efficient ways to attain them. But, as Beatrice Cherrier of the Institute for New Economic Thinking argued in an essay addressing Mr Roth’s lecture, these questions are fundamental to economics. The hard sciences deal much better with the ethical implications of their work, she says. And moral concerns affect human behaviour in economically important ways, as Mr Roth found to his frustration. To be useful, economists need to learn to understand and evaluate moral arguments rather than dismiss them.

Many economists will find that a dismal prospect. Calculations of social utility are tidier, and the profession has fallen out of the habit of moral reasoning. But those who wish to say what society should be doing cannot dodge questions of values.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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